Brazil & Southern Cone - July 2016 (ISSN 1741-4431)

In its 19 July update of its World Economic Outlook (WEO), the International Monetary Fund (IMF) revised slightly upwards its forecasts for Brazil, citing “some tentative signs of moderation in Brazil’s deep [economic] downturn”.  The IMF now expects the 2016 contraction to be “slightly less severe”, with a return to positive growth in 2017.

“Consumer and business confidence appears to have bottomed out in Brazil, and the GDP contraction in the first quarter was milder than anticipated”, the IMF noted in its latest WEO update, which examined global economic prospects in the wake of the United Kingdom (UK)’s vote to leave the European Union (EU). Consequently, the IMF now expects a real annual GDP contraction of 3.3% this year (up from -3.8% previously), with mild growth of 0.5% in 2017 (from zero growth previously). Brazil, along with Russia and China, were among only a few of the large emerging global economies to get a positive forecast revision from the IMF, which downgraded its global economic growth forecast to 3.1% this year and 3.4% in 2017 (from 3.2% and 3.5% previously) and warned that, depending on the evolution of the divorce negotiations between the UK and the EU “more negative outcomes are a distinct possibility”.

After a less-bad-than-expected first quarter GDP result (of -0.3% quarter-on-quarter and -5.4% year-on-year) and the change of government that saw the interim Michel Temer administration adopt a more orthodox economic policy, sentiment on the ground in Brazil is also a little more positive. The consensus of private economists in the central bank (BCB)’s 15 July ‘Focus’ report was for a real GDP contraction of 3.25% this year, up from from -3.44% a month ago, with expectations for next year improving marginally to +1.1%, from +1% previously. And with inflation beginning to fall and the Real strengthening, the BCB’s monetary policy committee was expected to leave the benchmark Selic interest rate stable at 14.25% at its 20 July meeting. Private economists expect monetary easing from August, with the Selic expected to end the year at 13.25%, before coming down to about 11% by end-2017.

Despite improving business and consumer sentiment, the BCB’s index of economic activity (IBC-Br) came in at -0.5% month-on-month (and -5.5% year-on-year) in May. This result was a little disappointing, after the IBC-Br had ended a run of 15 consecutive months of falling activity to register a mild positive result of 0.1% in April. The weakness in May remained broad-based moreover, with a notable fall in retail sales, along with lower activity in the agricultural and industrial sectors. Nonetheless, local economists suggest that Brazil’s domestic economy has – finally – reached bottom. Much will depend, however, on the ability of the interim Temer government to deliver its promised fiscal reforms (including in tricky areas like pensions), which would be supportive of business confidence and an eventual recovery in private sector investment.

Meanwhile, exports should benefit from a weaker Real. According to preliminary data from the industry, foreign trade and services ministry, total accumulated exports to mid-July were worth US$99.6bn, with imports of US$73bn, generating a trade balance surplus of US$26.65bn. Exports in June were running at about 6% higher year-on-year, led by manufactured and semi-manufactured goods including oil rig equipment, landscaping machines and other equipment, car engines, molten iron, raw sugar, cut wood and cellulose, among others. The latest Focus consensus was for a trade surplus of US$50.5bn this year, with foreign direct investment (FDI) of US$63.5bn. The stronger export position will allow the country’s current account deficit to fall to about US$15bn this year (about 1.4% of GDP), before rising back to around US$20bn in 2017 as import demand recovers.

• Selling state assets

As it continues with ambitious fiscal adjustment plans, the interim Michel Temer government estimates that it could generate up to R$120bn (roughly US$36bn) from the divestment/privatisation/concession of state assets. The federal government has an estimated R$2trn (US$568bn) in direct or indirect stakes in around 77 companies. Upon taking office, President Temer mooted the sale of minority stakes in the fuel distribution unit of the state-run oil firm, Petrobras, and the electricity company Furnas Centrais Elétricas, as well as assets partly owned by the airport authority, Infraero